What is buy now pay later? And does it impact your credit score?

Are you a Buy Now Pay Later (BNPL) enthusiast? While paying off your latest clothing haul over several interest-free instalments might seem like a good idea, it turns out that these kinds of services could be hurting your credit score. Read on to learn more about Buy Now Pay Later services and how they can affect your credit rating.

What is Buy Now Pay Later?

Buy Now Pay Later refers to a range of digital financial services that allow you to purchase products and services for a small amount and settle the rest of the balance across several instalments over a period of time. So long as you hold up your end of the bargain by paying the instalments on time, BNPL services don’t charge interest on the payments. 

In Australia, you have your pick of a number of different BNPL services, including Afterpay, Zip, Klarna, Humm and more.

Is Buy Now Pay Later a type of credit?

This is where things start to get a little tricky. Although BNPL services aren’t exactly like credit cards, they do technically offer a form of credit by way of their buy now pay later approach. 

Unlike traditional forms of credit, like loans and credit cards, most BNPL services don’t complete a credit check when you sign up to become a consumer. And because these types of financial services aren’t considered regular credit products, it means that positive credit behaviour, like paying your instalments on time, won’t go towards building a good credit score. With that said, if you miss an instalment, most BNPL providers can and will report these types of negative behaviours to credit reporting bodies, which can drag your credit score down. 

How does Buy Now Pay Later affect my credit score?

If you’re an avid BNPL user, you might be wondering does Afterpay impact your credit score? In short, yes, BNPL services like Afterpay can negatively impact your credit score which could affect your chances of getting a home loan. 

Here are just some of the ways BNPL services can affect your credit rating:

• Late or missed payments: If you fail to make payments on time, it can negatively impact your credit score. Late payments are typically reported to credit reporting agencies, and they can stay on your credit report for around two years, impacting your creditworthiness during that time.

• Multiple credit checks: When you sign up for a BNPL service, some providers may conduct a credit check on you. This is usually a "soft" inquiry, which does not impact your credit score. However, in some cases, especially if you're applying for a higher credit limit or a more traditional financing option within the BNPL service, a 'hard' credit check might be made, and this can have a small, temporary impact on your credit score.

• Risk of overspending: When you have access to these types of services, it can be easy to spend more than you have. These types of debts can quickly add up and when you throw interest fees on top, it can be easy to start falling behind in your payments. 

• Linked credit cards: Some people choose to link their BNPL accounts to their credit cards. If they’re not able to afford their credit card repayments they could end up with missed credit card payments, which can also bring down their credit score.

Tips for using Buy Now Pay Later services responsibly

If you’re planning on buying a home in the near future, the best course of action would be to steer clear of BNPL services altogether. Pay off any outstanding instalments and close down your accounts to avoid any further temptation. 

If property isn’t on the radar for you right now or you’re already a homeowner, here are a few tips you can follow to help you practice responsible spending with your BNPL account:

• Read up on the T&Cs: Don’t get caught out. Instead, familiarise yourself with the terms and conditions of the BNPL service you’re using. Pay special attention to fees, interest rates (if applicable) and any other potential charges.

• Budget for BNPL purchases: Treat your BNPL purchases like any other expenses and make sure it’s accounted for in your budget. It can be easy to get carried away and end up overspending when the instalments are spread out, so be conscious of your purchases on these platforms.

• Stick to one BNPL provider: With the regulations around BNPL providers set to change, it can be a good idea to stick with one provider. That way you reduce the chance of having multiple credit checks racked up on your credit history. Plus, it’s also a lot easier to keep track of your payments with one platform.

• Set up a direct debit: It can be easy to forget about settling those payment installments, so rather than leave it up to chance, set up a direct debit to make sure you pay on time. Just don’t be tempted to link it up to a credit card or that could lead to even more issues down the track.

• Check your credit score regularly: Keeping tabs on your credit score is a great way to make sure you’re maintaining a good score. If you notice any discrepancies, contact your credit information provider and ask for it to be amended. 

If you’re worried that your BNPL service could hurt your credit score, it’s probably a good sign that it’s time to deactivate your account and focus on building up your credit score. For more information on boosting your credit score, check out our blog on how to improve your credit score here.

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This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.‍